Business context and reporting period
First Mid-Illinois Bancshares, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2015. The bank holding company operates banking, insurance, trust and related businesses, primarily in central and southern Illinois. Results include the 12 Old National Bank branches acquired on August 14, 2015; balance-sheet comparisons with December 31, 2014 are therefore affected by the acquisition.
Financial performance and position
| Metric | Q3 2015 / Sep. 30, 2015 | Comparable period / prior date |
|---|---|---|
| Net interest income | $14.0 million for Q3; $40.0 million for nine months | Q3 2014: $13.0 million; nine months 2014: $38.4 million |
| Net interest margin | 3.30% for nine months | 3.43% for nine months 2014 |
| Net income | $3.7 million Q3; $11.9 million nine months | $3.9 million Q3; $11.6 million nine months 2014 |
| Net income available to common stockholders | $3.1 million Q3; $10.2 million nine months | $2.8 million Q3; $8.2 million nine months 2014 |
| Diluted EPS | $0.37 Q3; $1.33 nine months | $0.47 Q3; $1.38 nine months 2014 |
| Total assets | $2.09 billion | $1.61 billion at Dec. 31, 2014 |
| Loans, net of allowance | $1.22 billion | $1.05 billion at Dec. 31, 2014 |
| Total deposits | $1.73 billion | $1.27 billion at Dec. 31, 2014 |
| Stockholders’ equity | $203.8 million | $164.9 million at Dec. 31, 2014 |
For the nine months, total interest income was $42.6 million and other income was $14.3 million. Other expense was $34.9 million, up $1.7 million from 2014; the filing attributes added costs in part to the branch acquisition. The provision for loan losses increased to $889,000 from $495,000. Annualized return on average assets was 0.92% and return on average common equity was 8.86%.
Nine-month operating cash flow was $12.3 million. Investing activities provided $137.9 million, including $279.5 million of cash received in the acquisition, while financing activities provided $13.6 million. Cash and cash equivalents rose $163.7 million to $215.5 million. Reported debt and repurchase funding included $108.5 million of overnight repurchase agreements, $20.0 million of FHLB borrowings and $20.6 million of junior subordinated debentures.
Liquidity was described as sufficient. Available sources included $35 million in overnight federal funds lines, approximately $126 million of additional FHLB borrowing capacity subject to collateral, and an undrawn $15 million revolving credit line. The company and bank reported capital above applicable minimums; the bank met the well-capitalized standards. The company’s Tier 1 and total risk-based capital ratios were 13.84% and 14.88%, respectively.
Material changes versus comparable periods
- Q3 net income declined $252,000 year over year, despite higher net interest income and other income, as provision and operating expenses increased. Nine-month net income rose $307,000.
- Nine-month diluted EPS declined to $1.33 from $1.38, reflecting a larger weighted-average share count following the 2014 preferred-stock conversion and 2015 equity issuance, among other factors.
- The August branch acquisition added approximately $453 million of deposits and $156 million of loans at book value and expanded the company into southern Illinois. It generated $14.0 million of goodwill and a $6.2 million core deposit intangible; acquisition-related costs were approximately $1.1 million for the first nine months.
- A June 2015 private placement issued 1,392,859 common shares at $21 per share for approximately $29.3 million gross proceeds, principally to support the acquisition.
- Net interest margin narrowed to 3.30% from 3.43%, primarily because earning-asset yields fell more than funding costs. The allowance-to-loans ratio was 1.15%, down from 1.32%, partly reflecting the acquired performing loans.
- Nonperforming loans were $3.5 million, down from $4.5 million at year-end 2014. However, nine-month net charge-offs increased to $343,000 from $39,000.
Outlook, risks and unusual items
- No specific numerical earnings or growth guidance is provided. Management said liquidity was sufficient and capital remained strong. It cautioned that prolonged low rates and competition could continue to pressure asset yields and net interest margin.
- The company’s static gap analysis showed it was liability-sensitive cumulatively through 12 months, meaning rising rates could adversely affect net interest income. Management also highlighted uncertainty from rate changes, local economic conditions and competition.
- Credit exposure is concentrated in Illinois and includes $186.0 million of agriculture-related loans, including $154.8 million to other grain farming; $60.5 million to hotels and motels; and substantial lending to property lessors. Management cited low commodity prices, drought, reduced crop yields, and weaker regional travel or property conditions as potential sources of credit deterioration.
- The remaining pooled trust-preferred security had a $2.1 million fair value, a $1.0 million unrealized loss and Level 3 valuation inputs. It was in payment-in-kind status and on nonaccrual; further defaults or deferrals could cause additional impairment and affect earnings.
- Off-balance-sheet commitments and lines of credit totaled $294.5 million, with standby letters of credit of $7.5 million. The filing says expected draws and losses are uncertain and not necessarily equal to the stated commitments.
- Goodwill was tested and not impaired at September 30, 2015. The filing reports no material change in market risk, no legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- How the acquired branches affect subsequent-quarter deposit retention, loan growth, revenue, integration costs and expected cost savings; pro forma figures exclude anticipated synergies.
- Whether margin pressure persists, including the impact of the company’s 12-month liability-sensitive position and its large cash and securities balances.
- Credit trends in agriculture and other concentrated industries, including charge-offs, past-due loans, nonperforming assets and allowance adequacy.
- The cash-flow prospects, valuation assumptions and potential impairment risk of the trust-preferred security.
- Funding and liquidity exposure from overnight repurchase agreements, deposit flows, contractual obligations and undrawn customer commitments.
- The effects of share issuance and dilution on per-share earnings, and the company’s ability to maintain capital buffers as acquired assets grow.